Following on from last week, the Pound has continued to make robust gains against the Euro, rising to the highest level in a month versus the single currency following a band of positive economic reports in the UK. A gauge of retail price inflation, which provides the best indication of consumer price expectations, rose to a 15-year high at an annual rate of 4.6% in February and provides further evidence that the Bank of England will need to continue raising interest rates in either April or May. Elsewhere, a separate report from the Commerce department showed a sharp rebound in retail sales over the past month and the report will only fuel further speculation that consumer spending will be able to supplement three interest rate rises since August and continue to support economic growth. The Pound may remain strong against the major currencies this week amid yet another band of economic data and the focus will fall on the final estimate for UK gross domestic product in the fourth quarter. The report is expected to confirm that growth stayed above trend at a rate of 3.0% year-on-year in the final three months of 2006, showing that the UK economy expanded at the fastest pace since 2004. However, a report from the Bank of England is expected to show a marginal drop in UK mortgage approvals, which may rekindle speculation that the prospect of higher interest rates are beginning to weigh on the property market.
The Euro made rapid gains against the Dollar last week but fell to a six-week low versus the Pound following a particularly sparse week in terms of European economic reports. However, that trend is set to be dramatically reversed as the focus in terms of data will fall on the EC sentiment indices later this week, which are expected to show that consumer and business confidence has steadily improved this year. In addition, business sentiment in Europe’s largest economy is forecast to remain at robust levels with the German Ifo index expected to decline modestly to a reading of 106.5 in March. European consumer confidence may have risen to the highest level in six years this month as unemployment in Germany dropped to lowest level since 2001 while the overall jobless rate in the 13-nations sharing the Euro is expected to fall 7.2% in February. European economic growth has accelerated to a degree that may prompt the ECB to continue raising interest rates beyond the current 3.75% as consumer sentiment combined with lower unemployment helps spur growth. The Euro may also receive a boost this week as the initial estimate for Euro-zone inflation is expected to show a moderate rise to 1.9% in March, holding below the Central Bank’s 2.0% ceiling for yet another month. However, persistent inflationary concerns are expressed in money supply growth into the Euro-zone, which probably held at a 17-year high of 9.8% in February.
By the close of trading on Friday last week, the Dollar had managed to claw back some gains against the majors after dropping to the lowest level versus the Pound since early February as the Federal Reserve indicated that they are moving closer towards a neutral stance. However, the U.S currency found some support as a report on the housing market showed that sales of existing homes unexpectedly surged by the most in three years last month. The rebound in sales indicates that the dramatic and lasting slump in the U.S property market has finally peaked and therefore the housing data this afternoon will take on added significance. New home sales is expected to rise from the slowest pace in nearly four years in February with sales increasing 5.7% to rebound from the slowest since February 2003. The Dollar may find further support this week as the personal income and expenditure report includes details of the Core PCE deflator, which is the Fed’s preferred measure of inflation and is expected to rise 0.2% from 0.3% in January.
Data Released 26th March
U.S 15:00 New Home Sales (February)
written by Adam Solomon
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